Value of frequent-flier miles currency up in the air

United Airlines the latest carrier to change to rewarding points based on dollars spent

June 15, 2014|Phil Rosenthal

Travelers walk through Chicago’s O’Hare International Airport in August 2013. Starting in March, frequent fliers who take advantage of United Airlines’ loyalty program will get awarded points based on the dollars they spend on travel, not the number of miles they traverse. (Michael Tercha, Chicago Tribune)

When the central bank announced the big change, those of us who had squirreled away what we had earned over the years naturally were concerned about the effect on our savings plans.

Maybe we view our account as an emergency fund. Or it figures in our retirement plans. Or we're simply hoping to someday scrape enough together to afford something nice, like a vacation, for ourselves or those we love.

We can think of frequent-flier miles or points or whatever your airline calls them as money in the bank.

But no matter how much the points seem like a form of currency, a very smart finance professor has assured me they're not, although he did cite a similarity between airlines and the Federal Reserve we'll get to later.

What got me thinking about my personal stockpile of airline, hotel, rental car and credit card points was the recent wake-up call from United Airlines.

The Chicago-based carrier announced that, as of March, it will become the latest airline to switch to rewarding the number of dollars spent on travel rather than the number of miles traveled.

If you're someone paying high fares for short flights and actually spending more money for business- or first-class seats on overseas trips, you'll do great under United's new MileagePlus system, which starts its awards at five points per dollar spent. And it's a wash for those who get their miles through credit cards, as those exchange rates are unaffected.

But if you're a traveler who seeks out bargain coach fares on long trips, the new formula is likely to make it harder to build up your point savings through the air. Unless you pick up the needed points some other way, you may be better off taking the money you save over time on cheap tickets to buy an off-peak economy seat to Paris rather than holding out for a freebie.

Those who run businesses also may be less than delighted that United is following Delta in reconfiguring its loyalty program more in line with nonlegacy carriers such as Southwest, Virgin America and JetBlue. Greater vigilance may be required to ensure employees aggressively book at the lowest available prices, given the new incentive to spend more.

Meanwhile, American and US Airways, in midmerger, haven't said they'll change the way points are awarded. But give them time. Margins have always been tight industrywide, and if playing with points affords even a little more breathing room, there's little reason to hold out.

In some ways, the points are a secondary benefit for those who fly most frequently. The real road warrior values how elite status still largely tied to flight frequency and distance enables them to upgrade seats while avoiding lines, fees and other speed bumps in their travels.

Yet, like the points they rack up en route, these are perks that can be acquired through use of special credit cards or simply purchased. It's all been devalued.

There reportedly are more than 17 trillion unredeemed frequent-flier points outstanding, with more issued every day through not just airlines, but hotels, rental car companies, restaurants, retailers, credit cards and others. United may be giving them out five for a dollar. But each point, when we spend them for air travel, is worth between a penny and a dime, often less when used to buy merchandise.

We can get more for our miles if we can use them for more expensive travel. But at a conservative 2 cents per point, the 25,000 points often required for a domestic coach ticket are worth $500 and 17 trillion would be a $340 billion liability across the entire industry.

You see the potential problem if we all could cash them in at once, right?

"The airlines have a vested interest in not making (the mileage points) real liquid," said Robert Korajczyk, a finance professor at Northwestern University's Kellogg School of Management. "They'd rather have them sit there and (perhaps) expire. And over time, they're going to find ways to devalue them. It's just like the Fed printing money. They're going to find ways to extract what we call seigniorage and reduce that liability."

Seigniorage is derived from the right to issue money or, in this case, points.

"It's like a tax," Korajczyk said. "Essentially when the Fed prints money, they reduce the value of the currency through inflation. The recent past has been a little bit of an anomaly where they printed a lot of money and we haven't had much inflation. But inflation is another way of taxing people, and seigniorage is the economist's term for the inflation tax."

Add to that the airlines' ability to manage the inventory of free travel, particularly saver awards that require the least amount of points, as zealously as they manage their pricing for paid seats on any given flight. Never mind that they also sometimes tack processing costs on award travel while passing along taxes and government fees.